Can Brexit constitute frustration? Canary Wharf v European Medicines Agency

The High Court has ruled that a commercial lease is not capable of being frustrated by Brexit, rejecting two different arguments on frustration presented by the tenant. While the case related to the effects of Brexit on a commercial lease, the decision on the doctrine of frustration is also of significance in the context of commercial contracts.

Facts of the case

The European Medicines Agency (EMA) and Canary Wharf Limited entered into a 25-year old lease of premises in London to be used as the EMA's headquarters. The parties contractually agreed to enter into the lease in 2011 but the lease started in 2014. The lease was governed by English law. Following the UK's decision to leave the EU, the EU decided to move the EMA's headquarters to Amsterdam on the basis that, after Brexit, it would not be able to operate from the UK. An EU Regulation was then enacted to that effect in 2018.

In August 2017, the EMA informed Canary Wharf Limited that, if and when Brexit occurred, it would be treating the lease as having been frustrated. Canary Wharf Limited then issued proceedings before the High Court seeking a declaration that Brexit would not frustrate the lease and that the EMA would continue to be bound by its terms.

EMA's claim

The EMA argued, among other things, that Brexit would have the effect of frustrating the lease on the basis of:

• a supervening illegality, meaning that the performance of the lease by the EMA had become illegal. This was because following Brexit the EMA would no longer have the legal capacity to occupy the premises and to continue performing its obligations under the lease as it was legally obliged under EU law to move its headquarters to Amsterdam; and
• a common purpose (shared between the parties at the time they agreed to enter into the lease) going beyond what was agreed upon in the lease, which would be frustrated once the EMA was no longer able to use the premises as its headquarters. The common purpose was that the lease would provide a headquarters for the EMA for 25 years.

High Court decision

The High Court rejected both arguments presented by the EMA. Whilst it accepted that Brexit was not reasonably foreseeable when the lease was agreed and that certain protections the EMA enjoyed under EU law would be reduced after Brexit if the EMA was headquartered in a non-EU country, these factors were not sufficient for the lease to be frustrated.

Frustration based on supervening illegality

Did the EMA have legal capacity?

The High Court acknowledged that the EMA is protected by a series of immunities conferred on it by EU regulations. Whilst the High Court recognised that these would be degraded if the EMA remained in London following Brexit, it held that the EMA retained the legal capacity to deal with immovable property in a non-EU country.

It was also found that the EU itself would have the legal capacity to maintain the headquarters of its agencies in non-EU countries as there was no EU or international law prohibiting it from doing so. The lease had therefore not been frustrated by supervening illegality, as there were no legal constraints on the EMA's capacity/ power to perform its obligations under the lease.

Would a lack of legal capacity under EU law be relevant for an English law determination of frustration?

The High Court held that the English law of frustration applies to the performance of the parties' obligations under the contract and does not take account of any foreign law which relates to the incorporation of a party. Any such foreign law would only be relevant for the purpose of determining whether that party had the ability to enter into the contract in the first place. Accordingly, any supervening illegalities affecting the performance of the contract would need to be determined by reference to the governing law of the contract in question.

Would the supervening illegality be capable of frustrating the lease due to a lack of capacity? If so, would the EMA's case fail due to any such frustration being self-induced?

The High Court went on to consider whether the lease would be capable of being frustrated if the EMA had proved that it lacked the requisite capacity and if the English law of frustration could take into account a supervening illegality under EU law. It held that the lease would be capable of being frustrated in such a case as the EMA would be deprived of substantially all of the benefit of the lease (i.e. the EMA would be unable to use the premises after Brexit whilst remaining obliged to pay the rent).

However, even if the lease were capable of being frustrated, any such frustration would be self-induced as the EU could have done more than simply ordering the relocation of the EMA. The 2018 Regulation could have included provisions regarding the winding down of the EMA's position in London (but it did not do so).

Frustration on the basis of a common purpose

The High Court dismissed this argument, applying the multi-factorial approach set out in the case of The Sea Angel (in relation to how the doctrine of frustration should be applied):

"Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties' knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties' reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances."

The High Court accepted that Brexit was not reasonably foreseeable at the time the parties agreed to enter into the lease. However, there had been no mutual contemplation that the purpose of the lease was to provide the EMA with headquarters for 25 years and that such purpose would fail if that could not be achieved. The lease contemplated the possibility that the EMA might at some point be required to leave the premises involuntarily.

The High Court further stated that the EMA's continued occupation of the premises was not rendered impossible by Brexit, as there was no legal necessity for the EMA to leave the premises. The supervening event was in reality the EMA's involuntarily departure which was expressly provided for in the lease and there was no common purpose outside of the lease.

Comment

This case serves as a reminder that the doctrine of frustration is likely to be applied narrowly by the courts, particularly where the frustrating event to be relied upon is Brexit. However it does leave open the possibility of establishing frustration as a result of Brexit in certain circumstances, such as where a party can demonstrate that it would be deprived of substantially all of the benefit of a contract.

The EMA has been granted permission to appeal the High Court's decision and so it remains to be seen whether the decision will be overturned.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions.